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Private Client Update: Companies Act 2014 and Charities
The Companies Act 2014 (the “Act”) will come into force on 1 June 2015.
The Act, which will apply to every charity established as a company, brings welcome consolidation and modernisation of existing company law.
The Act is not relevant to charities established as trusts, charters or unincorporated entities.
As most incorporated Irish charities are companies limited by guarantee without a share capital (“Guarantee Companies”), they will be the focus of this update. However, it is imperative that the board of directors of Irish charities review the constitutional documents to establish the company type and ensure that they comply with the relevant requirements under the Act.
Guarantee Companies – Key Changes
- The memorandum and articles of association of existing Guarantee Companies will continue in force, although they will be jointly referred to as the “constitution”. The Act sets out certain mandatory provisions and optional provisions to be included in the constitution. The optional provisions will apply as the default regulations, unless the constitution dis-applies or modifies those optional provisions.
- The requirement for an object clause setting out the purpose of the company and the activity it can pursue will also continue and that object must be exclusively charitable to avail of charitable tax exempt status.
- Under the Act, Guarantee Companies can have one member, as opposed to the current seven member requirement. This change will be useful from an administrative perspective as presently should the membership drop below seven, the remaining members are obliged to rectify the situation within six months or run the risk of losing the benefit of limited liability.
- Guarantee Companies must have two directors under the Act. It is likely, however, that the Revenue Commissioners will continue to insist on the appointment of at least three independent unrelated directors in order to retain charitable tax exempt status. Unless the constitution provides otherwise, directors must retire by rotation.
- The name of Guarantee Companies must end with “company limited by guarantee” or “CLG”, save where an application is made to dispense with this requirement. Most charities will already have been granted an exemption from the requirement to have “limited” in their name and that exemption will be carried forward.
- Currently, all Guarantee Companies, regardless of size, are obliged to have their annual accounts audited. Under the Act, Guarantee Companies will be entitled to avail of an audit exemption if they satisfy certain conditions, although one member can object and insist that statutory auditors are appointed. The availability of this audit exemption does not change the condition imposed by the Revenue Commissioners and the Charities Regulatory Authority that accounts must be audited where the annual income exceeds €100,000.
- The Act introduces a requirement for directors of certain Guarantee Companies which reach prescribed thresholds (balance sheet value greater than €12.5 million and turnover greater than €25 million) to prepare a statement of compliance with company law and tax law to be included in the directors’ report in the annual accounts and to ensure that the company adopts the appropriate compliance measures.
- The Act consolidates existing statutory duties and codifies the eight principal fiduciary duties of directors. These will exist alongside the many existing statutory duties of directors (contained in the Act and in other legislation) which will continue to apply.
Steps to be taken
All charities established as companies should review their Memorandum and Articles of Association to ensure they are consistent with the mandatory and optional provisions prescribed by the Act.
Each charity company should consider adopting a new constitution, which will require approval of the Revenue Commissioners, to make reference to the Act (in place of earlier acts) so that the constituting document of the charity is clear as a standalone document.
This may also be an opportune time to consider the wider corporate governance structure of the charity in light of the enhanced focus on givernance brought about by this Act and the commencement of the role of the Charities Regulatory Authority.
Charities which have not been granted an exemption from the requirement to have “limited” in their name should apply now for that exemption. If such an application is not made within 18 months, the name of the charity will change automatically to end in “Company Limited by Guarantee”.